The Mogambo Guru

10/17/07 - Inflation is Scarier Than Skimpy Pizza

10/18/07 - Werewolves of Inflation

10/19/07 - 'Paltry' is a Laughable Distinction

10/22/07 - The Red Herring of Dollar Decline

10/23/07 - Cheaper to Freeze to Death

I had the Mogambo Bunker Of Paranoid Hysteria (MBOPH) in total lockdown, as I instinctively sensed something was wrong. Most things looked normal, however, and even though oil had risen to over $88 a barrel, the stock market was holding up fairly well, the bond market was holding up, and even Total Fed Credit (the stuff from which money-from-thin-air, the stuff of which price-inflation-from-thin-air, is originally created) was doing nothing much, either, and was actually down by another $3.2 billion last week.

"Animal spirits" and sheer guts to buoy the financial markets were still in evidence, too, as Doug Noland in his Credit Bubble Bulletin at PrudentBear.com reported that, "Bank Credit surged $54.5bn for the week (10/3) to a record $8.982 TN. Bank Credit has now posted an 11-week gain of $339bn (18.5% annualized) and y-t-d rise of $686bn, or 10.7% pace." Wow!

And some interesting news from a "new milestone" perspective was that Foreign Holdings of U.S. government and agency debt stashed in their accounts at the Fed rose by a few billion bucks last week, making the total in those Federal Reserve accounts finally go over the $2 trillion mark, rising to the princely sum of $2,003,863,000,000, which is properly pronounced as "two trillion, three billion, eight hundred sixty three million dollars", but in actual practice is pronounced with a foreign accent as, "You vill do vatever ve zay to do, or ve vill crush you, American pigs."

I don't know if it was coincidence or what, but as soon as we started talking about pigs, I started thinking about pork products, and how (looking at my watch to get the correct time) right about now was a perfect time to have a nice pizza smothered in a yummy variety of them, when, suddenly, here comes John Williams of Shadowstats.com!

Naturally, I pretended that I was not going to order a pizza, ("Pizza? Who? Me? No!"), because then I would have to share it with him and all the other people who mysteriously show up whenever I order a pizza, and you know how I feel about that kind of crap.

So I look at him obliquely, and cleverly arch one eyebrow to non-verbally ask, "Yeah? What do you want? It better not be pizza because I'm not ordering a pizza! No, sir! No pizza around here!"

This is the part of the story where I realized that he was onto my little lie, and he decided to kill me for it, by giving me another heart attack! I couldn't believe my eyes as I watched Mr. Williams probing, probing, probing his brain for the perfect piece of lethal information to send me to that Big Mogambo Economy In The Sky (BMEITS). Suddenly - blam! - I get it right between the eyes when he says that the money supply is exploding, and that "September M3 Annual Growth Hit 14.7%".

My heart, as predicted, stopped beating at the shock, but my anger at the situation sent so much adrenaline into my blood that it started beating like a trip-hammer going, "Blam! Blam! Blam!" Again, I'm ready for action!

Then, also probably coming around to snag a little of my damned pizza, Peter DeGraaf of pdegraaf.com shows up to report that money is surging all over the place, and "The money supply worldwide is increasing about seven times faster than the supply of newly mined gold." At this, I had to laugh because that means that gold is getting more and more undervalued in terms of overvalued currencies with every waking moment, as the world's central banks are creating seven times more money and credit with every waking moment than the mines of the world can produce more gold!

Even though I rubbed my grasping, grubby fingers together in glee, I did not say anything, of course, in case somebody wanted to know something like, "How undervalued is gold?" and I would have to either lie my head off or admit I have no idea, which I actually don't because I am stupid, to my dismay.

So it was a tense few moments, but fortunately, Mr. DeGraaf took care of that little valuation chore, and said, "Adjusted for inflation, today's gold price of $740.00 compares to just over $300.00 in 1980 dollars." And in case you did not get the message, he explained it in capital letters; "GOLD IS CHEAP!"

Meanwhile, my heart is smashing through my chest with its incessant pounding, pounding, pounding at the inflation in the money supply. The reason is, obviously, that all this new money (monetary inflation) always means price inflation is coming, which is the worst thing that an economy can inflict on itself, and for which the penalty is measured in misery, bankruptcy, pain and suffering by the ton… Or, if you are on the metric system, tonne. Either way, it's a lot of economic agony!

Sure enough, Mr. Williams goes on to say, "Watch Out for CPI Annual Inflation Surge!", as all of the excess money and credit that the world has been pumping out has made the seasonally-adjusted September PPI rise "by a stronger than expected 1.1% (1.0% unadjusted) for the month, against a 1.4% contraction for August." One percent in one month! This is absolutely terrifying inflation in prices!

Ominously, he says, the change in annual PPI inflation literally doubled when it, "jumped to 4.4% in September, up from 2.2% in August."

By this time I am screaming, "No more! Please! No more bad news about price inflation, the one terrible thing to be feared above all things!"

And then my brain flashes to a pizza without delicious pork products, and I realize my mistake. So I hasten to amend this by saying, "No more! Please! No more bad news about price inflation, the one thing to be feared above all things, except maybe skimpy pizza! But almost as bad!"

I was still poring over the latest from John Williams at Shadowstats.com, when I noticed that he wrote that the "Year-to-year change in September retail sales was a gain of 5.0% versus 3.8% in August, before any inflation adjustments", but that inflation is getting so bad that it "could wipe out much of the reported sales gain, after adjustment for pricing increases."

The horror of what he was saying crept into my Puny Mogambo Brain (PMB); people paid more money, but bought less stuff! Yikes! What in the hell kind of bizarre economy do you call that?

Now, retail sales picking up like that appears to be healthy economic growth, until you remember that these are merely raw, nominal sales, which is the same thing as my wife taking the credit card and charging some clothes, food or medicine for herself and the kids, and when I open the bill, I thunder, "You bought food, clothes and medicine last month, too, and not only are you now buying them more, but you have never spent this much before! Where in the hell am I supposed to get this much additional money to pay for these additional frills, you worthless trash?" With a sniff, she says, "They aren't additional frills! Prices are up so high that I actually bought less stuff, you stupid creep!"

I decide to ignore this evidence of inflation in prices, and decide that my wife's explanation seems just a little too glib for me. So I question her further by saying, "Are you lying to me, you lying, spendthrift witch, who likes to see me be so poor that I can't afford that snazzy new set of golf clubs that I need and you deserve to go to hell for it?", and she yells back, "No, YOU go to hell, you cheap bastard!"

Naturally, I don't accept this kind of underserved criticism, and I scream back, "No, you go to hell and take those ugly, mutant, halfwit Earthling children of yours with you!" which causes her to mysteriously get all angry, like I said something wrong! Even though SHE is the one spending all the money, and it is ME that is suffering for it! See what kind of silly crap I have to put up with around here all the damned time?

Mr. Williams appears completely disinterested in how my greedy, hateful family is spending me into the poorhouse, and actually seems to take their side in the argument when he says that inflation in prices is pushing up the bills for everybody for everything, and more and more people and entities are spending more and more money because prices are rising so fast.

He even says, probably thinking he was making a wry joke, "As to the happy news that the gimmicked federal deficit for fiscal year 2007 was just $162.8 billion, versus $248.2 billion in 2006, keep in mind that the gross federal debt rose by $500.7 billion in the same fiscal 2007, to $9.008 trillion."

Hey! That's right! The government simply budgeted more borrowing, which they did, and so the budget deficit appears lower on paper, even though they borrowed and spent more than they budgeted! At that ugly news, I found my hands clenching into Powerful Mogambo Fists Of Outrage (PMFOO)!

But he was not through with me yet, as he went on to report that the federal government will find that "the financial statements for the year will show a deficit based on generally accepted accounting principles likely well in excess of $4 trillion, come mid-December."

Four trillion bucks a year in current and deferred federal government spending! A third of GDP! Yikes!

And it gets worse than that, believe it or not, as we learn from Chuck Butler of Everbank, who reports in his famous Daily Pfennig missive that (to paraphrase) the economy is crap, and the budget deficit is going to get worse, in that "Treasury issuance is expected to rise 50% this year! OUCH! It seems the slowdown that no one wants to admit is happening has reduced tax receipts for the first time since 2003."

And if that was not bad enough, Peter Grandich of the Grandich Letter states that "state pension plans have deteriorated from a $20 billion surplus in 2001 to a $381 billion deficit last year, according to the National Association of State Retirement Administrators (NASRA). This deficit means the assets they have in their portfolios today aren't enough to cover the present value of the long-term retirement promises they made!"

The skies grow dark and werewolves howl in the distance. Ahhhh-oooooo! Werewolves! Werewolves of inflation! Ahhhh-ooooo!

The news in the housing market is bad and getting worse. For example, JMR Steve in La Paz sends a link to a National Public Radio broadcast, which opened with the news that "Foreclosures in the U.S. are at their highest levels in 50 years."

To deal with this, NPR goes on to report that "President Bush and members of Congress have appealed to the mortgage industry to lower rates, and the industry says it is working with struggling homeowners. But housing advocates say the response has been paltry" and that, additionally, "Now, the top prosecutors in 37 states are putting more direct pressure on lenders."

Hahaha! No kidding? Hahahaha! A bank loans some underpaid loser too much money to buy too much house, on which the bank will make some minimal profit even if he manages to pay the mortgage, and now the government wants the bank to take a loss to bail him out? Hahaha! And the response has been "paltry"? Hahaha!

But not even the downturn in the housing market can deter spending-addicted Americans, as I gather from an article sent to me by JMR John H. from the Baltimore Sun that said that, "As growth in home equity balances has fallen almost to zero, credit-card balances have increased at a 17 percent annual rate over the past six months, according to a report by Merrill Lynch economist David Rosenberg." And the trend, he writes, "is clearly accelerating" and in contrast, "A year ago card balances were shrinking."

So now that home equity loans are not available to tap because equity is not being created, people are reverting to charging their excessive demands for instant gratification on their credit cards? I yelp in horror!

And it must be true, as I get the same news from the AP news service, "Consumer Borrowing Jumps at Fastest Pace in 3 Months, Led by Higher Use of Credit Cards". The sorrowful details are that "The Federal Reserve reported that consumer credit rose at an annual rate of 5.9 percent in August, the biggest increase since a 7.9 percent jump in May. Consumers have boosted their borrowing at the fastest pace in three months, turning increasingly to their credit cards to replace home equity loans as a source of ready cash."

As a guy who wants to be a writer (since it does not involve any heavy lifting, regular hours or social skills), but who can't get a real job making real money writing real copy for a real newspaper or real news service like the AP, I naturally get a Big, Big Bang (BBB) out of being able to leap to my feet and scornfully shout "Wrong, AP! You don't know what in the hell you are talking about! It ain't cash at all! It's debt, you stupid freaking morons!"

I know that nobody is going to ask me what I mean by that, so I will explain, unbidden, that when you spend cash, you exchange cash for stuff, and you end up with goods and services, but poorer as the tradeoff. In short, no continuing liabilities.

When you spend borrowed equity or borrowed money, on the other hand, you end up with the goods and services AND a new debt that will haunt you and haunt you until you wake up screaming and tearing your hair in frustration!

Applying my Fabulous Mogambo Economic, Financial And Composition Skills (FMEFACS) to this ugly fact, the sentence should really read, "Consumers have boosted their borrowing at the fastest pace in three months, turning increasingly to their credit cards to replace home equity loans as a source of ready debt that is already so big that it is bankrupting them, and by so much that they have to constantly take on new debt, more and more debt, just to live day to day, since they don't have any freaking money to buy anything because their money is all being used to make the minimum monthly payment as it is!"

Naturally, I assume that the AP will soon be calling me on the phone to thank me for helpfully pointing out their stupidity, and offer me a fancy-pancy job at a huge, huge salary. While we wait, I will point out that, in total, consumer credit rose by $12.2 billion in August, taking that source of debt to a mind-boggling record $2.469 trillion, which is a staggeringly lot of debt, and makes me note with alarm in my Brave, Manly Mogambo Voice (BMMV) to disguise my petrified Squeaky Mogambo Voice (PSMV) that there are only 100 million people in America who have a non-government job, and thus there are only 100 million people who can produce a profit by their labors.

The significance of this is that each one of these 100 million American workers has to be productive enough to generate $24,690 (to eventually pay the current debt), plus the interest charges on any unpaid balance until such time as it is paid, even if nobody ever incurs another dime of debt. Which they, unfortunately, will. We're freaking doomed!

Hey! The phone is ringing! This could be it!

The spooky, chilling news is that M3 is going up at an annual rate of over 14%, which is made worse by the fact that the rate of growth is getting faster and faster!

Naturally, the dollar went down in value, and now the dollar index has dropped to less than 78, which is about as low as it has ever gotten in modern history.

James Turk in his Freemarket Gold & Money Report asks, "Will the mismanagement of the dollar end in deflation as the mountain of dollar denominated debt collapses reducing the money supply, or will it end in inflation as the Federal Reserve pumps up the money supply in order to bail-out debtors - and in particular, the U.S. government - with an endless quantity of newly created dollars?"

Well, I was bravely gearing up to try and answer that question, hoping to impress that cute little reporter from the World Sun Times Herald newspaper with how smart I was, perhaps overcoming being handicapped in the romantic vein by her strong antipathy to my disgusting appearance, manners, odor, hateful attitude, vicious streak or old age, and I was really sweating bullets since I had no idea what in the hell he was talking about, making my odor problem even worse.

Fortunately, I was suddenly relieved to discover that I did not even have to try, as Mr. Turk went on to explain that, "The reality is that this debate is a red herring. Only half the question is being addressed, namely the supply of money. In other words, the debate centers on whether the supply of dollars will increase or decrease. What about demand? The antagonists to this debate ignore demand by assuming that the demand for dollars will continue to grow. But what if it doesn't? What if it drops?" In fact, he says, "In the end, demand is more important than supply."

When he said, "demand is more important than supply", it really hit home with me, as a recent analysis of my business records revealed that while I offer an unlimited supply of stupid economic and investment advice ("Go to hell and leave me alone!"), there is no demand! This instantly explains why my income is literally zero and I have no money, and his point is thus proved. Secretly, I have to laugh, because all this time I thought it was because my wife and kids were stealing me blind, and I have been making their lives into a living hell for it! Hahaha! I guess the joke's on me!

So I was naturally disappointed that he did not actually answer that question about what happens if demand for dollars does not grow, either, and I was raising my hand to tell him about how it is getting close to lunchtime, and if he needed someone to sum it all up, I was prepared to say, "We're freaking doomed!" and be done with it.

Well, I could see the blood drain from his face as he noticed that I wanted to interject a comment. Thus motivated, he quickly got to the point and answered by saying, "I expect that the demand for the dollar will eventually plummet as years of overspending, under-saving and over-borrowing in the United States eventually take their toll on an over-valued currency."

He explains, "Because the dollar is a liability (i.e., someone's promise), the quality of the dollar is only as good as the assets on the monetary balance sheet. It is these assets that give the dollar its value, a recognition based upon the most fundamental accounting premise that liabilities are only as good as the assets supporting them. If the assets did not have value, then the liabilities we call dollars would not have any value either and would not circulate as currency. Are these IOU's on the monetary balance sheet really worth $12,006.7 billion? That is the single question of paramount importance."

Perhaps this "what is it worth?" question that prompted the astonishing activity in the banks that FT.com announces with the headline, "Banks agree $75bn mortgage debt fund". The laughable details are that Citigroup (NYSE:C), Bank of America (NYSE:BAC) and JP Morgan Chase (NYSE:JPM) "announced plans for a fund to buy mortgage-linked securities in an attempt to allay fears of a downward price-spiral that would hit the balance sheets of big banks." Hahaha!

The New York Times helpfully explains that "the effort is intended to help SIVs [structured investment vehicles] that need to sell securities do so in an orderly manner."

What these banks are proposing to do is to collectively put up credit guarantees worth about $75 billion to $100 billion (or whatever it takes!) for this new fund, which will be named the Master Liquidity Enhancement Conduit (MLEC).

The Executive Intelligence Review News Service characterizes it as "Treasury Secretary Henry Paulson, of Goldman Sachs, and his sidekick, Treasury Undersecretary for Domestic Finance ('Plunge Protection'), Robert Steel, also of Goldman Sachs, are trying to orchestrate a crazy $100 billion bailout scheme, which dwarfs the $3-4 billion bailout arranged for hedge fund LTCM by the Federal Reserve in 1998."

Obviously, the purpose of the bailout is simplicity itself; nobody trusts the mortgage derivatives that the banks have created, which have now imploded and revealed as being toxic crap that may not be worth anything, since the financial instruments do not have any demonstrated market value simply by virtue of the fact that they have never traded on the open market, and so nobody wants to buy them. Now everybody is sitting on trillions of dollar's worth of these stupid, mysterious things. What to do?

And time is of the essence, too, as Reuters quotes Robert Arnott of Research Affiliates as saying, "We are coming off the greatest lending bubble in U.S. history. We will feel its impact for a very long time."

So, the Fed and the Treasury have all decided that they are going to set up a huge special fund, with untold billions of pretend dollars, drawing in more investors to which the banks will sell short-term paper to finance the bailout, so that the banks can trade derivatives around amongst themselves, thus establishing their "market price"! Hahaha!

Suddenly, I realize that I may be too hasty in dismissing this scheme! This remarkable idea has given me a terrific business idea! You are going to love this! You and I will go into business, see, and each of us will (believe it or not) sell dog turds back and forth to each other, priced at the same per-ounce price as gold! Hour after hour, we will busily sell them back and forth between us, you buying mine and me buying yours, thus proving that there really IS a market for dog turds, and they are provably worth their weight in gold! We, like these banks, will both make a fortune! Whee! Hahahaha!

Reuters decided not to report on my fabulous new Mogambo business venture (MBV) or my new Mogambo Dog Turd ETF, but they did report essentially the same thing when they wrote, "The fund that is being contemplated would bail out funds known as 'structured investment vehicles,' or SIVs".

This comes at a time (as just a coincidence I am sure! Hahaha!), when "Banks including Citigroup, Merrill Lynch & Co, and UBS have in recent weeks announced billions of dollars in asset write-offs and are still struggling to sell off billions of dollars in loans that financed acquisitions globally."

Ooops! If banks can't get rid of their own turds, then perhaps my own dog turd business may struggle, too! Damn!

Cheaper to Freeze to Death

One of the reasons that I am so irritable is that I am constantly astonished by the stupidity of the Federal Reserve and the other central banks of the world creating so much excess money and credit, which creates inflation in prices.

JMR Mark Lundeen is doing what he can to calm me down, and sends along a clever quip about inflation from Pat Paulsen, who is listed as, "1968 Presidential Candidate & Comedian". Mr. Paulson comically says, "On the issue of inflation, I think I could solve it no matter how much money it took." Hahaha! This sounds exactly like the Federal Reserve and the moron "yes-men" with which they surround themselves!

Speaking of butthead "yes-men" morons, let me point out the idiocy of Martin Feldstein, who is noted as being a "professor of economics at Harvard and chaired the Council of Economic Advisers under President Reagan", although you would not know it from the way he thinks.

For example, his tired, predictable little essay is titled, "A more competitive dollar is good for America", which is (despite its argumentative title) ordinary for the most part, containing such hackneyed jewels as, "Since a falling dollar raises the cost of imports and increases the export demand for U.S. products, a dollar decline by itself puts upwards pressure on the U.S. inflation rate", which is true, as far as it goes.

Then he takes a sharp turn into Bizarro Coo-Coo Land when he says, "But the overall inflation rate need not rise if the Federal Reserve sticks to its goal of price stability." Hahahaha! What? Hahaha! What kind of insanity is that? Hahahaha! How can prices be rising in the first place if the Fed is achieving price stability? Hahaha!

If you really want to know, I'll cleverly tell you what the Fed is really doing about "price stability" by trotting out the other witticism sent to me by Mr. Lundeen, penned by a Professor W.H. Hutt: "The technique of inflation demands that governments and their agencies shall continuously deceive the public about the fact, the speed and the duration of inflation intended. Ministers of finance have no option but to employ what has been called 'the necessary untruth'."

So I say with a smug tone to my voice, "Well, Mr. Feldstein, how do you like them apples, moron?" I notice that he doesn't answer me directly, and rather just goes on that after his assumed "Federal Reserve sticking to its goal of price stability", things would be better in that "relative increases in the prices of tradable goods would be offset by lower inflation in other goods and services." Hahahaha! I can't believe I am reading this stupidity! Hahahaha! Says who? Where in the hell did that come from? Hahaha!

Blithely continuing on and ignoring my raucous laughing and hooting in Raw Mogambo Contempt (RMC), he yammers about how, "Markets must look beyond the slogan that a strong dollar is good for America to recognise (sic) that a more competitive dollar will help sustain U.S. growth and is necessary to correct America's trade deficit." In short, the erstwhile government attitude that "a strong dollar is good for America", which produced all the growth in the economy by keeping imported inflation low for decade after decade is now, for some unexplained reasons, wrong after all these decades, and that now some higher import inflation will magically "help sustain U.S. growth"! Hahaha! This is Too, Too Much (TTM)!

Then he put me right over the top when he said, "Governments of our trading partners must recognise (sic) that the dollar's decline will weaken demand in their economies and should use fiscal and regulatory measures to maintain their growth and employment." Hahaha! Now I am laughing so hard that my stomach hurts and I think I peed in my pants! Hahaha! He is saying, as astonishing as it sounds, that foreign countries should create excess money and credit to destroy their own currencies, bringing them down to the debased level of the dollar, which has been destroyed by the Federal Reserve creating excess money and credit! Hahaha! This is freaking unbelievable! This is "economics" to this halfwit? Hahahaha!

He somehow comes to the absolutely asinine conclusion that "With appropriate policies, the dollar's decline will correct the imbalances that threaten the global economy without higher inflation in the U.S. or decreased growth in the rest of the world." Hahahaha! He is saying that you can get a free lunch with "appropriate policies"! Hahahaha! And this guy supposedly teaches economics at Harvard! Hahahaha!

Perhaps Mr. Lundeen sent these quips to me because from Brian Blackstone at Dow Jones we learn that there is some Big Ugly News (BUN) about the Import Price Index. He writes, "In the 12 months through September, import prices increased 5.2%, up sharply from August's 1.9% year-on-year rate and the highest since August 2006".

This astonishing and terrifying news about import inflation is mostly because of higher oil and food prices, which are (being as sarcastic as I can manage without actually vomiting in rage) things we don't even need, according to the Federal Reserve, because neither food nor energy are included in their estimate of "core inflation", which is a fact that I already know, so don't write me and tell my how stupid I am to worry about the stupid prices of stupid imported energy and stupid food when the stupid government has already told me they are completely irrelevant to anybody's stupid lives.

While I quickly run to the restroom to throw up at this idiocy, I will leave you with some comments about energy from "Views from the Fuse" at DailyReckoning.com, which passes on the news from the AP news services that "The average total heating oil bill for the winter months is projected to rise by 28 percent from a year ago, to $1,834." A 28% rise in price to keep from freezing to death this winter!

The "good" news, I guess, is that, "Those who heat their homes with natural gas will see an increase of around 6 percent. This is because of ample natural gas supplies, according to the American Gas Association."

And the inflation news just keeps getting worse, as we had a 4.4% y-o-y increase in the Producer Price Index in September. And yet people wonder why I am in here puking into the toilet and cursing the Federal Reserve while I do it. Ugh.

Mogambo sez: There is just enough gold, silver and oil in the world to permit you, me and a few other smart people to prosper by owning them during these exciting times of banking and governmental economic idiocies, because everything they do seems specifically designed to drive up their prices because everything they do drives up their prices.

And the more idiotic and corrupt the central banks and governments act, the higher the prices of gold, silver and oil will go. And since there is no limit to the idiocy and corruption of government, there is no limit to how high gold, silver and oil will go. It's just that simple.

P.S. To get The Daily Reckoning sent directly to your inbox, sign up for our free email newsletter, or if you prefer to use RSS, subscribe to the Daily Reckoning RSS feed.

The Mogambo Guru is quoted frequently in Barron's, The Daily Reckoning and other fine publications.

The Daily Reckoning is FREE!
Click below…

The Daily Reckoning is FREE! Click below…